Dodging death of a thousand cuts

IF THE 2008 meltdown was a bloodbath, then this year could be described as a death by a thousand cuts. However, even though traditional lenders are pulling back, the alternate lending market is growing in size and relevance. While we have not had the shock drop to the markets we saw in 2008 and 2009, the inflationary pressures, rising interest rates, growing unemployment and the continued threat to our sovereign credit rating is certainly taking its toll. We can count on traditional lenders to retreat even further when it comes to their willingness to extend credit.

The South African economy has suffered a barrage of negative sentiment of late and the banking sector and traditional lending market has not escaped.

The real collateral damage will be investors or business owners looking to take advantage of growth opportunities.

While South Africa narrowly avoided its investment grade rating being downgraded to junk status early in June, the pervading feeling is that this still may happen, come December.

This cloud of impending doom as well as the knock-on effects of slowing growth, have impacted local banks.

Under strain

All three rating agencies have rerated the local banking sector to negative from stable citing deteriorating operating conditions, and Moody’s warned that profitability in the sector may come under strain due to a falling demand for credit and lower business opportunities.

There is no doubt that the bigger banks will be pulling back on approving deals.

They will be looking to keep their profitability up and will continue to focus on key, existing clients.

The ratings drop will have its impact and, together with tighter regulations such as Basel III, we can expect a slowdown in the number of deals approved by banks. Although we saw a big drop in 2008, there was still light at the end of the tunnel.

The outlook for those looking for credit now is not so bright, a fact which has been confirmed by the Business Confidence Index hitting record lows for May.

However, while the traditional lenders may be battening down the hatches, all is not lost for businesses looking to capitalise on a downturn economy.

South Africa is following the route of the US and the UK, where the alternate lending market is growing by leaps and bounds.

The lightly regulated entrants such as specialist investment houses, asset managers, insurance funds, and peer-to-peer lending institutes offer fairly cheap and convenient finance.

According to data analysis firm, Preqin, investors worldwide have raised almost $80bn (R1.2 trillion) for direct lending funds in the past two years due to the rising demand from small businesses for alternative sources of finance.

Specialised providers

In the US, about 25 percent of loans to small to medium companies come from alternate lenders positioning themselves as “business development companies”.

Locally, there are far more alternate lenders than many people are aware of. Currently there are well over 60 specialised finance providers, which exclude banks and private equity firms.

These include specialised equipment finance providers, general and specialist finance houses and bridging financiers.

We all know that there are opportunities to be had in a downturn economy. Sellers are more realistic and those who have access to capital have good bargaining power.

Investors need to remain circumspect and check for the fundamentals. They should also be well capitalised before entering negotiations.

However, the good news is that access to capital is still available. In fact, some financiers have never seen deal flow like we they're getting right now.